ANSWERS TO PROBLEMS
1. Anita and Barry were negotiating, and Anita’s attorney prepared a long and carefully drawn contract,
which was given to Barry for examination. Five days later and prior to its execution, Barry’s eyes became
so infected that it was impossible for him to read. Ten days thereafter and during the continuance of the
illness, Anita called upon Barry and urged him to sign the contract, telling him that time was running out.
Barry signed the contract despite the fact he was unable to read it. In a subsequent action by Anita, Barry
claimed that the contract was not binding upon him because it was impossible for him to read and he did
not know what it contained prior to his signing it. Should Barry be held to the contract?
Answer: Fraud. Yes, decision in favor of Anita and against Barry. Barry’s defense that the contract was not
binding upon him because he had not and could not have read it prior to signing it is not valid. Here, there
2. (a) Johnson tells Davis that he paid $150,000 for his farm in 2010, and that he believes it is worth twice
that at the present time. Relying upon these statements, Davis buys the farm from Johnson for $225,000.
Johnson did pay $150,000 for the farm in 2010, but its value has increased only slightly, and it is presently
not worth $300,000. On discovering this, Davis offers to reconvey the farm to Johnson and sues for the
return of his $225,000. Result?
(b) Modify the facts in (a) by assuming that Johnson had paid $100,000 for the property in 2010. What
result?
Answer: Fraud: Materiality.
(a) Decision for Johnson; Davis is not entitled to the return of his $225,000 as long as Johnson actually
believed his farm was worth approximately $300,000. Johnson’s statement with respect to the value of the
3. On September 1, Adams in Portland, Oregon, wrote a letter to Brown in New York City, offering to sell to
Brown one thousand tons of chromite at $48 per ton, to be shipped by S.S. Malabar sailing from Portland,
Oregon, to New York City via the Panama Canal. Upon receiving the letter on September 5, Brown
immediately mailed to Adams a letter stating that she accepted the offer. There were two ships by the name
of S.S. Malabar sailing from Portland to New York City via the Panama Canal, one sailing in October and
the other sailing in December. At the time of mailing her letter of acceptance Brown knew of both sailings
and further knew that Adams knew only of the December sailing. Is there a contract? If so, to which S.S.
Malabar does it relate?
Answer: Mistake. There is a contract, and it relates to the S.S. Malabar sailing in December. In the classic
Peerless case (Raffles v. Wichelhaus, 2 Hurlstone and Coltman Reports 906) there were two ships sailing
4. Adler owes Panessi, a police captain, $5,000. Adler threatens that unless Panessi discharges him from the
debt, Adler will disclose the fact that Panessi has on several occasions become highly intoxicated and has
been seen in the company of certain disreputable persons. Panessi, induced by fear that such a disclosure
would cost him his position or in any event lead to social disgrace, gives Adler a release but subsequently
sues to set it aside and recover on his claim. Will Adler be able to enforce the release?
Answer: Duress. No. The Restatement, sSecond, Contracts, Section 175, defines duress as a manifestation
5. Harris owned a farm that was worth about $600 per acre. By false representations of fact, Harris induced
Pringle to buy the farm at $1,500 per acre. Shortly after taking possession of the farm, Pringle discovered
oil under the land. Harris, on learning this, sues to have the sale set aside on the ground that it was
voidable because of fraud. Result?
Answer: Fraud in the Inducement. Decision in favor of Pringle. Because Pringle was fraudulently induced to
6. On February 2, Phillips induced Miller to purchase from her fifty shares of stock in the XYZ Corporation
for $10,000, representing that the actual book value of each share was $200. A certificate for fifty shares
was delivered to Miller. On February 16, Miller discovered that the book value on February 2 was only
$50 per share. Will Miller be successful in a lawsuit against Phillips? Why?
Answer: Fraud in the Inducement. Yes, Miller will prevail against Phillips. The statement that the actual
book value of the shares of stock in XYZ Corporation was $200 per share was a statement of material fact
7. Doris mistakenly accused Peter’s son, Steven, of negligently burning down her barn. Peter believed that
his son was guilty of the wrong and that he, Peter, was personally liable for the damage, since Steven was
only fifteen years old. Upon demand made by Doris, Peter paid Doris $25,000 for the damage to her barn.
After making this payment, Peter learned that his son had not caused the burning of Doris’ barn and was in
no way responsible for its burning. Peter then sued Doris to recover the $25,000 he had paid her. Will he
be successful?
Answer: Mistake. Yes, judgment for Peter for $25,000 against Doris. The payment was made under a mutual
mistake of material fact. Both Peter and Doris mistakenly believed that Doris’ barn had been negligently
8. Jones, a farmer, found an odd-looking stone in his fields. He went to Smith, the town jeweler, and asked
him what he thought it was. Smith said he did not know but thought it might be a ruby. Jones asked Smith
what he would pay for it, and Smith said $200, whereupon Jones sold it to Smith for $200. The stone turned
out to be an uncut diamond worth $3,000. Jones brought an action against Smith to recover the stone. On
trial, it was proved that Smith actually did not know the stone was a diamond when he bought it, but he
thought it might be a ruby. Can Jones void the sale? Explain.
Answer: Mistake: Nature of Subject Matter. No, Jones cannot void the sale. Mutual ignorance upon the part
9. Decedent Joan Jones, a bedridden, lonely woman of eighty-six years, owned outright Greenacre, her
ancestral estate. Ficky, her physician and friend, visited her weekly and was held in the highest regard by
Joan. Joan was extremely fearful of suffering and depended upon Ficky to ease her anxiety and pain.
Several months before her death, she deeded Greenacre to Ficky for $10,000. The fair market value of
Greenacre at this time was $250,000. Joan was survived by two children and six grandchildren. Joan’s
children challenged the validity of the deed. Should the deed be declared invalid due to Ficky’s undue
influence? Explain.
Answer: Undue Influence. Yes, decision for Decedent’s children. Restatement,2nd, Contracts, §177(1)
defines undue influence as the “unfair persuasion of a party who is under the domination of the person
10. Dorothy and John Huffschneider listed their house and lot for sale with C. B. Property. The asking price
was $165,000, and the owners told C. B. that the size of the property was 6.8 acres. Dean Olson, a
salesman for C. B., advertised the property in local newspapers as consisting of six acres. James and Jean
Holcomb signed a contract to purchase the property through Olson after first inspecting the property with
Olson and being assured by Olson that the property was at least 6.6 acres. The Holcombs never asked for
or received a copy of the survey. In actuality, the lot was only 4.6 acres. The Holcombs now seek to
rescind the contract. Decision?
Answer: Fraud in the Inducement. Decision for James and Jean Holcomb. When Olson falsely represented
that the property was at least 6.6 acres a fraud was committed. As the sales agent Olson had an obligation
11. In February, Gardner, a schoolteacher with no experience in running a tavern, entered into a contract to
purchase for $40,000 the Punjab Tavern from Meiling. The contract was contingent upon Gardner’s
obtaining a five-year lease for the tavern’s premises and a liquor license from the State. Prior to the
formation of the contract, Meiling had made no representations to Gardner concerning the gross income
of the tavern. Approximately three months after the contract was signed, Gardner and Meiling met with an
inspector from the Oregon Liquor Control Commission (OLCC) to discuss transfer of the liquor license.
Meiling reported to the agent, in Gardner’s presence, that the tavern’s gross income figures for February,
March, and April were $5,710, $4,918, and $5,009, respectively. The OLCC granted the required license,
the transaction was closed, and Gardner took possession on June 10. After discovering that the tavern’s
income was very low and that the tavern had very few female patrons, Gardner contacted Meiling’s
bookkeeping service and learned that the actual gross income for those three months had been
approximately $1,400 to $2,000. Will a court grant Gardner rescission of the contract? Explain.
Answer: Fraudulent Misrepresentation/Justifiable Reliance. No. To sustain a case of fraudulent
(1977).
12. Christine Boyd was designated as the beneficiary of a life insurance policy issued by Aetna Life Insurance
Company on the life of Christine’s husband, Jimmie Boyd. The policy insured against Jimmie’s permanent
total disability and also provided for a death benefit to be paid on Jimmie’s death.
Several years after the policy was issued, Jimmie and Christine separated. Jimmie began to travel
extensively, and Christine therefore was unable to keep track of his whereabouts or his state of health.
Jimmie, however, continued to pay the premiums on the policy until Christine tried to cash in the policy to
alleviate her financial distress. A loan previously had been made on the policy, however, leaving its cash
surrender value, and thus the amount that Christine received, at only $4.19. Shortly thereafter, Christine
learned that Jimmie had been permanently and totally disabled before the surrender of the policy. Aetna
also was unaware of Jimmie’s condition, and Christine requested that the surrendered policy be reinstated
and that the disability payments be made. Jimmie died soon thereafter, and Christine then requested that
Aetna pay the death benefit. Decision?
Answer: Mutual Mistake of Fact. Decision for Mrs. Boyd. As a matter of equity, the surrender agreement had
to be rescinded. Had Mrs. Boyd known the true facts at the time she surrendered the policy, she certainly
13. Plaintiff, Gibson, entered into negotiation with W. S. May, president of Home Folks Mobile Home Plaza,
Inc., to buy Home Plaza Corporation. Plaintiff visited the mobile home park on several occasions, at
which time he noted the occupancy, visually inspected the sewer and water systems, and asked May
numerous questions concerning the condition of the business. Plaintiff, however, never requested to see the
books, nor did May try to conceal them. May admits making the following representations to the plaintiff:
(1) the water and sewer systems were in good condition and no major short-term expenditures would be
needed; (2) the park realized a 40 percent profit on natural gas sold to tenants; and (3) usual park
vacancy was 5 percent. Additionally, May gave plaintiff the park’s accountant-prepared income statement,
which showed a net income of $38,220 for the past eight months. Based on these figures, plaintiff
projected an annual net profit of $57,331.20. Upon being asked whether this figure accurately represented
income of the business for the past three years, May stated by letter that indeed it did.
Plaintiff purchased the park for $275,000. Shortly thereafter, plaintiff spent $5,384 repairing the well and
septic systems. By the time plaintiff sold the park three years later, he had expended $7,531 on the wells
and $8,125 on the septic systems. Furthermore, in the first year, park occupancy was nowhere near 95
percent. Even after raising rent and the charges for natural gas, plaintiff still operated at a deficit.
Plaintiff sued defendant, alleging that May, on behalf of defendant, made false and fraudulent statements
on which plaintiff relied when he purchased the park. Decision?
Answer: Fraud: Justifiable Reliance. Defendant’s motion for summary judgment denied. The essential
elements of fraud are: “(1) false representation made by the defendant; (2) scienter; (3) an intention to
14. Columbia University brought suit against Jacobsen on two notes signed by him and his parents,
representing the balance of tuition he owed the University. Jacobsen counterclaimed for money damages
due to Columbia’s deceit or fraudulent misrepresentation. Jacobsen argues that Columbia fraudulently
misrepresented that it would teach wisdom, truth, character, enlightenment, and similar virtues and
qualities. He specifically cites as support the Columbia motto: “in lumine tuo videbimus lumen” (“In your
light we shall see light”); the inscription over the college chapel: “Wisdom dwelleth in the heart of him
that hath understanding”; and various excerpts from its brochures, catalogues, and a convocation address
made by the University’s president. Jacobsen, a senior who was not graduated because of poor scholastic
standing, claims that the University’s failure to meet its promises made through these quotations
constituted fraudulent misrepresentation or deceit. Decision?
Answer: Fraud: False Representation. Judgment for Columbia University. The necessary elements of an
action for deceit are: (1) a false representation; (2) knowledge or belief on the part of the person making
the representation that it is false; (3) an intention that the other party act thereon; (4) reasonable reliance by
15. Frank Berryessa stole funds from his employer, the Eccles Hotel Company. His father, W. S. Berryessa
(Berryessa), learned of his son’s trouble and, thinking the amount involved was about $2,000, gave the
hotel a promissory note for $2,186 to cover the shortage. In return, the hotel agreed not to publicize the
incident or notify the bonding company. (A bonding company is an insurer that is paid a premium for
agreeing to reimburse an employer for thefts by an employee.) Before this note became due, however, the
hotel discovered that Frank had actually misappropriated $6,865. The hotel then notified its bonding
company, Great American Indemnity Company, to collect the entire loss. W. S. Berryessa claims that the
agent for Great American told him that unless he paid them $2,000 in cash and signed a note for the
remaining $4,865, Frank would be prosecuted (which note would replace the initial note). Berryessa
agreed, signed the note, and gave the agent a cashier’s check for $1,500 and a personal check for $500.
He requested that the agent not cash the personal check for about a month. Subsequently, Great American
sued Berryessa on the note. He defends against the note on the grounds of duress and counterclaims for
the return of the $1,500 and the cancellation of the uncashed $500 check. Who should prevail? Explain.
Answer: Improper Threats. In an action on the note, Berryessa (Frank was not sued) resisted liability upon the
grounds of duress and lack of consideration. He counterclaimed for the return of the $1,500 and the
16. Jane Francois married Victor H. Francois. At the time of the marriage, Victor was a fifty-year-old
bachelor living with his elderly mother, and Jane was a thirty-year-old, twice-divorced mother of two.
Victor had a relatively secure financial portfolio; Jane, on the other hand, brought no money or property
to the marriage.
The marriage deteriorated quickly over the next couple of years, with disputes centered on financial
matters. During this period, Jane systematically gained a joint interest in and took control of most of
Victor’s assets. Three years after they were married, Jane contracted Harold Monoson, an attorney, to
draw up divorce papers. Victor was unaware of Jane’s decision until he was taken to Monoson’s office,
where Monoson presented for Victor’s signature a “Property Settlement and Separation Agreement.”
Monoson told Victor that he would need an attorney, but Jane vetoed Victor’s choice. Monoson then asked
another lawyer, Gregory Ball, to come into the office. Ball read the agreement and strenuously advised
Victor not to sign it because it would commit him to financial suicide. The agreement transferred most of
Victor’s remaining assets to Jane. Victor, however, signed it because Jane and Monoson persuaded him
that it was the only way that his marriage could be saved. In October of the following year, Jane informed
Victor that she had sold most of his former property and that she was leaving him permanently. Can Victor
have the agreement set aside as a result of undue influence?
Answer: Undue Influence. Yes, decision for Victor. The essence of undue influence is the subversion of
another’s free will in order to obtain assent to an agreement. The degree of persuasion that is necessary to
17. Iverson owned Iverson Motor Company, an enterprise engaged in the repair as well as the sale of
Oldsmobile, Rambler, and International Harvester Scout automobiles. Forty percent of the business’s
sales volume and net earnings came from the Oldsmobile franchise.
Whipp contracted to buy Iverson Motors, which Iverson said included the Oldsmobile franchise. After the
sale, however, General Motors refused to transfer the franchise to Whipp. Whipp then returned the
property to Iverson and brought this action seeking rescission of the contract. Should the contract be
rescinded? Explain.
Answer: Nonfraudulent Misrepresentation. Yes. Historically, an action for fraud required that the injured
party show that the misrepresentation upon which it detrimentally relied was made with the speaker’s
18. On February 10, Mrs. Sunderhaus purchased a diamond ring from Perel & Lowenstein for $6,990. She
was told by the company’s salesman that the ring was worth its purchase price, and she also received at
that time a written guarantee from the company attesting to the diamond’s value, style, and trade-in value.
When Mrs. Sunderhaus went to trade the ring for another, however, she was told by two jewelers that the
ring was valued at $3,000 and $3,500, respectively. Mrs. Sunderhaus knew little about the value of
diamonds and claims to have relied on the oral representation of the Perel & Lowenstein’s salesman and
the written representation as to the ring’s value. She seeks rescission of the contract or damages in the
amount of the sales price over the ring’s value. Decision?
Answer: Fraud/Misrepresentation of Fact/Opinion of Expert as to Value. Decision for Mrs. Sunderhaus.
Although in general a statement of opinion as to value is not considered to be a statement of fact, the
19. Division West Chinchilla Ranch advertised on television that a five-figure income could be earned by
raising chinchillas with an investment of only $3.75 per animal per year and only thirty minutes of
maintenance per day. The minimum investment was $2,150 for one male and six female chinchillas.
Division West represented to plaintiffs that chinchilla ranching would be easy and that no experience was
required to make ranching profitable. Plaintiffs, who had no experience raising chinchillas, each invested
$2,150 or more to purchase Division’s chinchillas and supplies. After three years without earning a profit,
plaintiffs sue Division for fraud. Do these facts sustain an action for fraud in the inducement?
Answer: Fraud. Yes, judgment for plaintiffs. Division knew that plaintiffs had no experience in chinchilla
20. William Schmalz entered into an employment contract with Hardy Salt Company. The contract granted
Schmalz six months’ severance pay for involuntary termination but none for voluntary separation or
termination for cause. Schmalz was asked to resign from his employment. He was informed that if he did
not resign, he would be fired for alleged misconduct. When Schmalz turned in his letter of resignation, he
signed a release prohibiting him from suing his former employer as a consequence of his employment.
Schmalz consulted an attorney before signing the release and upon signing it received $4,583.00 (one
month’s salary) in consideration. Schmalz now sues his former employer for the severance pay, claiming
that he signed the release under duress. Is Schmalz correct in his assertion?
Answer: Duress. No. A person with business experience who understands the nature of what he is signing and
21. Treasure Salvors and the State of Florida entered into a series of four annual contracts governing the
salvage of the Nuestra Senora de Atocha. The Atocha is a Spanish galleon that sank in 1622, carrying a
treasure now worth well over $250 million. Both parties had contracted under the impression that the
seabed on which the Atocha lay was land owned by Florida. Treasure Salvors agreed to relinquish 25
percent of the items recovered in return for the right to salvage on State lands. In accordance with these
contracts, Treasure Salvors delivered to Florida its share of the salvaged artifacts. Subsequently, the US
Supreme Court held that the part of the continental shelf on which the Atocha was resting had never been
owned by Florida. Treasure Salvors then brought suit to rescind the contracts and to recover the artifacts
it had delivered to the State of Florida. Should Treasure Salvors prevail?
Answer: Mutual Mistake of Fact. Yes, judgment for Treasure Salvors. Both parties based their contracts upon
22. International Underwater Contractors, Inc. (IUC), entered into a written contract with New England
Telephone and Telegraph Company (NET) to assemble and install certain conduits under the Mystic River
for a lump sum price of $149,680. Delays caused by NET forced IUC’s work to be performed in the winter
months instead of during the summer as originally bid, and as a result a major change had to be made in
the system from that specified in the contract. NET repeatedly assured IUC that it would pay the cost if
IUC would complete the work. The change cost IUC an additional $811,810.73; nevertheless, it signed a
release settling the claim for a total sum of $575,000. IUC, which at the time was in financial trouble, now
seeks to recover the balance due, arguing that the signed release is not binding because it was signed
under economic duress. Is IUC correct?
Answer: Duress. Yes, judgment for IUC. A release signed under duress is not binding. To prove that there was
duress, IUC must show that (1) one side involuntarily accepted the terms of another; (2) the circumstances
23. Conrad Schaneman was a Russian immigrant who could neither read nor write the English language. In
2009 Conrad deeded (conveyed) a farm he owned to his eldest son, Laurence, for $23,500, which was the
original purchase price of the property in 1979. The value of the farm in 2009 was between $145,000 and
$160,000. At the time he executed the deed, Conrad was an eighty-two-year-old invalid, severely ill, and
completely dependent on others for his personal needs. He weighed between 325 and 350 pounds, had
difficulty breathing, could not walk more than fifteen feet, and needed a special jackhoist to get in and out
of the bathtub. Conrad enjoyed a long-standing, confidential relationship with Laurence, who was his
principal adviser and handled Conrad’s business affairs. Laurence also obtained a power of attorney from
Conrad and made himself a joint owner of Conrad’s bank account and $20,000 certificate of deposit.
Conrad brought this suit to cancel the deed, claiming it was the result of Laurence’s undue influence. The
district court found that the deed was executed as a result of undue influence, set aside the deed, and
granted title to Conrad. Laurence appealed. Decision?
Answer: Undue Influence. Judgment for Conrad Schaneman. A confidential or fiduciary relationship exists
between two persons if one has gained the confidence of the other and purports to act or advise with the
24. At the time of her death, Olga Mestrovic was the owner of a large number of works of art created by her
late husband, Ivan Mestrovic, an internationally known sculptor and artist whose works were displayed
throughout Europe and the United States. By the terms of Olga’s will, all the works of art created by her
husband were to be sold and the proceeds distributed to members of the Mestrovic family. Also included
in the estate of Olga Mestrovic was certain real property which 1st Source Bank (the Bank), as personal
representative of the estate of Olga Mestrovic, agreed to sell to Terrence and Antoinette Wilkin. The
agreement of purchase and sale made no mention of any works of art, although it did provide for the sale
of such personal property as dishwasher, drapes, and French doors in the attic.
Immediately after closing on the real estate, the Wilkins complained to the Bank of the clutter left on the
premises; the Bank gave the Wilkins an option of cleaning the house themselves and keeping any personal
property they desired, to which the Wilkins agreed. At the time these arrangements were made, neither the
Bank nor the Wilkins suspected that any works of art remained on the premises. During clean-up,
however, the Wilkins found eight drawings and a sculpture created by Ivan Mestrovic to which the Wilkins
claimed ownership based upon their agreement with the Bank that, if they cleaned the real property, they
could keep such personal property as they desired. Who is entitled to ownership of the art work?
Answer: Mutual Mistake of Fact. The art belongs to the estate, to be sold, with the proceeds distributed to the
family. The parties in this case shared a common presupposition as to certain facts which proved false. The
25. Ronald D. Johnson is a former employee of International Business Machines Corporation (IBM). As part
of a downsizing effort, IBM discharged Johnson. In exchange for an enhanced severance package,
Johnson signed a written release and covenant not to sue IBM. IBM’s downsizing plan provided that
surplus personnel were eligible to receive benefits, including outplacement assistance, career counseling,
job retraining, and an enhanced separation allowance. These employees were eligible, at IBM’s
discretion, to receive a separation allowance of two weeks’ pay. However, employees who signed a release
could be eligible for an enhanced severance allowance equal to one week’s pay for each six months of
accumulated service with a maximum of twenty-six weeks’ pay. Surplus employees could also apply for
alternate, generally lower-paying, manufacturing positions. Johnson opted for the release and received
the maximum twenty-six weeks’ pay. He then alleged, among other claims, that IBM subjected him to
economic duress when he signed the release and covenant-not-to-sue, and he sought to rescind both. What
will Johnson need to show in order to prove his cause of action?
Answer: Duress. To constitute duress, there must be an application of such pressure or constraint as compels
someone to go against their free will. Parties to a contract must freely and mutually consent to its terms. If
consent to a contract is not freely given, the contract may be rescinded by the parties. In order to establish a
action on the part of IBM. Therefore, at the time he signed the release, Johnson was not subject to
economic duress.
ANSWERS TO “TAKING SIDES” PROBLEMS
Mrs. Audrey E. Vokes, a widow of fifty-one years and without family, purchased fourteen separate dance
courses from J. P. Davenport’s Arthur Murray, Inc., School of Dance. The fourteen courses totaled in the
aggregate 2,302 hours of dancing lessons at a cost to Mrs. Vokes of $31,090.45. Mrs. Vokes was induced
continually to reapply for new courses by representations made by Mr. Davenport that her dancing ability
was improving, that she was responding to instruction, that she had excellent potential, and that they were
developing her into an accomplished dancer. In fact, she had no dancing ability or aptitude and had
trouble “hearing the musical beat.” Mrs. Vokes brought action to have the contracts set aside.
(a) What are the arguments that the contract should be set aside?
(b) What are the arguments that the contract should be enforced?
(c) What is the proper outcome? Explain.
ANSWER:
(a) Ordinarily, for a misrepresentation to be actionable, it must be one of fact rather than of opinion.
Where, as here, however, a statement is made by a party having superior knowledge, that statement
may be taken as one of fact, although it would be considered an opinion if the parties were dealing on